Activist hedge funds are among the more divisive topics in finance. They generally position themselves as shareholder advocates, using their shares in public companies to agitate for management changes, asset sales, stock buybacks, and other actions aimed at boosting stock prices. But their detractors see them as arrogant interlopers who interfere in operations and collect quick profits, leaving broken companies in their wakes.
Both takes are wrong, according to University of Washington’s Ed deHaan, Stanford’s David Larcker, and Chicago Booth’s Charles McClure. Activism, they argue, has little effect on either corporate operating performance or long-term stock prices.
According to a review of previous studies on hedge fund activism—conducted by Carnegie Mellon’s Matthew Denes, University of Washington’s Jonathan M. Karpoff, and Villanova’s Victoria McWilliams—eight of 11 studies conclude that activist campaigns did fuel long-term stock-price performance. But deHaan, Larcker, and McClure sampled the performance of almost 2,000 targets of hedge fund activism between 1994 and 2011 and, unlike previous studies, sorted the results by the size of the companies targeted.
Hedge fund activism boosted stock-price performance in a lasting way for only the very smallest companies targeted, they find. The average market value of these companies was $22 million. Meanwhile, 80 percent of activists’ targets were larger, and those campaigns tended to yield negligible results.
The findings “do not strongly support arguments that activist interventions drive long-term wealth for the average investor,” write the researchers. “At the same time, we find no evidence that activist interventions destroy value, so our findings also fail to support critics’ proposals to restrict activism.”
However, the findings indicate that one of the more extreme forms of activism—forcing management to sell their company to a strategic acquirer—seems to work out quite well. Just over a quarter of the companies in the study wound up delisting their equity. Of these, the vast majority were acquired “and experience[d] significantly positive long-term returns,” the researchers write.